Controlling the cost of labor is critical to your success. When bidding, you make an allowance for the amount of labor needed for the job. If the bid is done well, and the person doing the work is properly trained and motivated, the result is profit. Even if you have no employees and do all of the work yourself, you have to allow for both your labor AND a profit for the company.
When you hire, you should be doing this to generate more bottom-line profit, not more expenses. Through trial and error, for example, I discovered that we spent the same number of hours at the customer?s house whether I sent two guys or one. Isn?t that crazy? It proved to me that one person of the two was not working at any given moment on the job. We shifted to one-person crews and cut our labor by 45%.
When I use the title ?Labor?, I am talking about a percentage of the sales for your company.
If you use a helper, your cost for labor could be as low as 10% of your sales. If you use employees to do all of the work, labor could run anywhere up to 25% (or even to 50% of the overall price of the job (using a two-person crew). If your labor costs are higher than about 25% of any job bid, you are either a) paying too much; b) running inefficiently; c) bidding too low.
Let?s look at this as a House Wash contractor. Experience tells us that we can wash a 2500 sq. ft. house in about an hour to an hour and a half ? because we use an efficient method, an efficient cleaner, and our employees are well-trained. We bid the job at $1 per running foot per story, which came out to be $285 on this fictitious house wash job.
Beyond the actual wash time of an hour or so, we have travel time and set-up and knock-down time to consider in total. Let?s assume we use up a total of two hours for this job (including travel to the job). BTW, a contractor does not charge for travel to and from. Common practice is ?one direction only?.
Paying an hourly rate, our employee might get $14 per hour, which costs us about $17 per hour with employer taxes. If we offer benefits like health insurance, it might even be $20 per hour in overall cost.
When we consider travel time, set-up, wash time, and knock-down time, by experience we know that the employee should use right at 2 hours for this job, with an overall Labor Cost to us of $32 - $40. (If your employees take more time than this, re-training and observation may be called for.) This amounts to somewhere around 11% to 14% in overall labor cost.
BTW, if Low-Ball Louie bid that same job for $129, his labor cost dollars would be the same number of dollars spread over a smaller sale amount. In that case, labor cost would run between 25% and 31% of the sale. The difference between 14% and 31% is enormous, and could mean the difference between his success and failure in the business.
Some contractors determine employee pay by using a percentage of the amount collected for the job. That is how I paid our Deck Techs in the field. We gave them 18% of the total amount we collected for any job they did. If two guys worked on the project, they split the 18%. This rate might be higher than a lot of you would like, but once we trained a Deck Tech we had to pay generously or risk losing him. You might find you can pay as little as 14% for your work in your area. The only caution I can give you is to avoid violating the minimum wage law.
Side Note: If you do pay a percentage of the amount collected for the job, we suggest that this pay includes satisfying the customer to the point that the customer pays for the work. It means that ?go-backs? do not justify extra pay. Often this approach leads to employees doing better work the first time around.
This method guarantees that the contractor who bids properly will be profitable. It caps the percentage labor cost at a fixed number, which makes budgeting and planning easy. A big benefit of paying this way is how it favors the employee. It allows any employee to have complete control over his earning power. If you bid jobs to produce $100 per hour for the company, paying an employee 18% of that job means that he earns $18 per hour! If he gets done in less time, he is earning even more per hour. He can either work fewer hours each week and make the same as before, or he can do more jobs each week and earn a lot more. He is in the driver?s seat on his pay. You will never have to give a raise, as raises are built in with improved performance.
(NOTE: Paying 18% to the employee often means that real cost to the employer runs about 22%)
Tracking labor for each job is an essential business function. Make it a point to track the performance of every employee (as well as yourself). This way, you get a clear picture of who is most efficient. You can track by job dollar value or job square footage. Comparisons of who generates what number of dollars per hour tells you who needs to stay and who needs to go. The inefficient guy who only produces $70/hour in work is nowhere near as valuable to hang on to as the guy who brings you in $120 per hour.